Washington is afraid of its own foreign debt: is the global economy facing a new crisis?

The accumulated external debt of $34 trillion began to terrify the US leadership. This is a “frightening number,” said US Treasury Secretary Janet Yellen. Washington maintains that at least inflation is under control, but there are suspicions that a new global financial crisis is just around the corner. Russia feels confident in the escalating situation overseas, since during the sanctions it managed to isolate its economy from foreign attacks.

In early January, the US government debt exceeded $34 trillion, which became an absolute record for the American economy. The states not only do not intend to repay loans, but are also increasing loans – over the past year alone, the country’s external liabilities increased by $4 trillion. That’s a “frightening number,” Yellen said. Moreover, the figure inspires fear not only in Washington, but also in large foreign investors, such as China, Japan, South Korea and the EU, who are slowly reducing investments in US government bonds. It may be too early to say that the problems of the American financial system will drag other countries into a new global crisis, because Yellen says there are no risks of rising inflation, however, for example, experts from the Russian Congress believe that the US national debt will be the main threat to the global economy in 2024. Mark Goikhman, an analyst at the Capital Skills Financial Academy, commented on the situation in the American financial market for MK.

– Does the current US foreign debt of $34 trillion really look scary?

– Yellen expresses his position because he is the head of the US Treasury and is responsible for servicing this debt. The higher the volume of debt obligations, and they are indeed huge, the more difficult it is to pay interest. Moreover, there is no clear idea yet that the interest rate of the Federal Reserve System (FRS) will be reduced soon. The current combination of high interest rates, which have persisted for many months, and increasing levels of US debt, is causing severe strain on the US budget. The relatively emotional lady Janet Yellen, who previously served as Fed Chairman and now as Treasury Secretary understands the situation very well, which is why she calls it frightening. This sector is Yellen’s area of ​​responsibility. She recognizes that there are real risks that as the debt continues to increase, it will become increasingly difficult to pay interest on it, and warns that something needs to be done.

From this point of view, the head of the American Ministry of Finance is, of course, right. At the same time, US economic authorities, primarily the Biden administration, are trying to increase America’s debts. The Fed, for its part, is in no hurry to make these debts cheaper by lowering interest rates. Indeed, the situation is frightening and dangerous and is fraught with unpleasant consequences in the future.

– What can Washington do to reduce debt and is the American government going to do anything? Yellen says everything is under control…

– Since American bonds are the standard for reliability among world debt securities, if necessary, an increase in debt is quite possible. New debt securities can be issued to pay off existing obligations. All previous administrations have resorted to this, and in this regard there are no fears of new defaults in the United States and refusals to pay interest. Because in any case, maintaining the existing reliability of these securities, you can always count on there being new buyers for them.

On the one hand, Yellen has a major headache; on the other hand, these securities continue to be attractive to new investors. The US Treasury Secretary’s warning is correct and does not serve as a reason to refuse to service debts.

The US financial leadership is trying to find the best option – while the possibility of servicing the debt remains and there is a reserve for attracting new investors to the US public debt. Yellen simply warns of possible dangers: with the galloping rate of growth of the national debt, in a few years there may be a risk that a huge part of the budget will have to be allocated to paying off interest, which will negatively affect the implementation of other government programs. Then drastic decisions will have to be made to limit borrowing and reduce debt, but apparently this will not happen before the next presidential election in the United States, since any reductions in budget expenditures may be viewed extremely negatively by the electorate.

– Does the exorbitant American debt threaten global finance?

– There are some fears that sooner or later US foreign debts will be so high that it will be extremely difficult to service them. Then holders of American securities, representing almost half the countries of the world, including China, Japan, and the EU, would probably prefer that high lending rates remain and the rate of debt accumulation slow down somewhat. It is beneficial for outside investors that yields are high and that the reliability of American securities continues to justify itself. That is, the ratio of US debts to GDP was more orderly.

– Will Washington’s actions to increase debt lead to a new global financial crisis?

– It has long been accepted in the world that the US national debt is a pyramid, which cannot be secured if all the securities are unexpectedly presented for repayment at the same time. Oddly enough, the world is happy with this situation. Because no one yet doubts the reliability of American bonds. In addition, there are not many alternative instruments that would combine both high reliability and high profitability. But the “bell” from Janet Yellen makes it clear to global investors that they should not relax and need to closely monitor the financial situation in the American market.

There are no reasons to predict an imminent default in America and the subsequent global economic crisis, but hypothetically, if there is a threat of not a technical, but a real default, the situation will become deplorable. The US has lifted restrictions on borrowing. If the American authorities decide to suspend or completely refuse to service their debts, the world economy will plunge into a new large-scale financial crisis.

– How does Russia feel in such a situation? Do we have anything to lose?

– Every cloud has a silver lining. Due to sanctions, our country has long been faced with problems in external borrowing and freezing of reserves. Russian investments in American securities have decreased. Our possibilities for borrowing or long-term investments in unfriendly countries are close to zero. This, of course, limits the diversification of Russian investments, but at the same time reduces dependence on investments in foreign markets and reduces the risks of limiting payments on such securities.